The unhappiest bull market ever

The symbol of Wall Street’s late-1990s bull market was the giddy dot-com start-up.

The housing bull market of the last decade will be remembered for the “no income, no job, no problem” mortgage. Good times!

For the current U.S. stock bull market, the defining image may be of a grimacing investor, shoulders shrugged in resignation.

Let’s face it: If you’re on board for this ride you’re making money, but it’s not really fun and you might rather be earning 6% a year on a bank CD, if only you could.

This may be the unhappiest bull market ever. We love to hate it, but that may be just egging it on.

U.S. stock indexes climbed this week to new multiyear highs. The Standard & Poor’s 500 index now is up 96% from its 12-year low reached in March 2009, when the world was supposed to end, but didn’t.

Just since the start of this year the S&P is up 5.7%, despite constant catcalls from disbelievers who warn that it’s all going to come crashing down, and soon.

Yes, the economy has improved since September, when the latest leg of the rally began. The manufacturing sector is booming, retail sales remain surprisingly strong and corporate earnings continue to expand.

But jobs still are extremely hard to find, which understandably makes the idea of a sustainable recovery seem inconceivable to many Americans.

Yet instead of investing in sackcloth and ashes, some people are back to betting on the Happiest Place on Earth. Shares of Walt Disney Co. rose this week to an all-time high (at least before inflation) of $43.41, finally topping the previous high of $43.04 reached in April 2000.

The catalyst for the stock’s latest surge was Disney’s report that fiscal first-quarter earnings rocketed 54% on a 10% rise in revenue.

A new high for Disney amid the Unhappiest Bull Market on Earth. Go figure.

Admittedly, it’s far easier to be bearish than bullish on U.S. equities. That has been true nearly every minute of the market’s run-up since March 2009. But then, it’s almost always true on one level or another, says Jason Trennert, chief investment strategist at Strategas Research Partners in New York.

“Bears always sound smarter than bulls, a distinction greatly enhanced with a British accent, real or affected,” Trennert says, with tongue half in cheek.

This time, one oft-recited refrain of the bears is that the stock market and other assets are floating on the sea of money the Federal Reserve has unleashed in the financial system, thanks to short-term interest rates near zero and the central bank’s ongoing purchases of about $100 billion a month of Treasury bonds.

There’s a reason why “Don’t fight the Fed” has endured as one of Wall Street’s favorite maxims. When money is loose, asset prices tend to rise.

And Fed Chairman Ben S. Bernanke hasn’t made a secret of his desire to see stocks rally. Higher share prices may not keep the economic recovery going, but they can’t hurt.

So the upshot of the bearish case is that the stock market’s advance is phony because of the Fed’s massive support — or perhaps just phonier than it normally is when monetary policy is easy.

Meanwhile, even optimists have to wonder how the economy, and the market, will overcome the daunting challenges on the near horizon: the mind-boggling U.S. budget deficit; state and local government spending cuts that will leave tens of thousands more jobless; Europe’s austerity plans; and the rising food inflation bedeviling emerging-market economies.

But seemingly forgotten by the bears is that Wall Street got exactly what it wanted in the November elections and their aftermath: Republican control of the House, extension of the Bush-era tax cuts (including on capital gains and dividends), a payroll tax cut and a business-friendlier Obama administration.

Investors also have other reasons to be thinking more favorably about U.S. stocks. One is that the bloom has come off the bond market, which is where many investors have taken refuge over the last two years.

Interest rates on Treasury and municipal bonds have risen sharply since October as the economy has improved and as some investors have begun to worry about higher inflation down the road. Higher market yields mean existing bonds have dropped in value, leaving most bond mutual funds in the red in recent months.

Pimco Total Return, the world’s biggest bond fund, is off 0.4% since Dec. 31. That’s hardly a catastrophe, but it pales compared with the average domestic stock fund’s gain of 4.6% this year.

Of course, if interest rates keep rising, that will eventually be a problem for the equity market. But it’s also true that we’re at the stage of the economic cycle where it would be natural for investors to move some money from bonds to stocks, if the bet is on continuing growth.

American stocks seem to be benefiting from another big shift as well: the slump in many emerging markets in recent months.

Stocks in China, India, Brazil and other emerging economies have weakened as those governments have been forced to tighten credit to combat higher inflation, particularly in food costs. The average emerging-markets stock fund is down 4.7% this year.

What’s more, social unrest in the Middle East, which on Friday led to Egyptian President Hosni Mubarak’s ouster, has refocused investors on the political risk in emerging markets.

Long term, emerging markets still have enormous appeal for their growth potential. But for now some U.S. investors in those markets are taking some money off the table and moving it home.

In the last four weeks, net cash inflows to domestic stock mutual funds have exceeded inflows to foreign stock funds, according to the Investment Company Institute. That reverses the trend of most of the last 18 months, when U.S. investors almost consistently favored foreign funds over domestic funds.

Is it a good sign if U.S. stocks are rising because they are, in effect, winning by default?

Reluctant bulls can be the best kind of bulls because they may just continue to slowly come in from the sidelines, prolonging stocks’ advance.

Trennert makes the case that there’s plenty of room to run. For one thing, he notes, this is not a replay of the late-1990s bull market, when stock valuations rocketed.

Based on his estimate of operating earnings for the S&P 500 companies in 2011, the market is priced at a moderate 14 times earnings. What that shows is that, short of a sudden plunge back into recession, the well-known fears dogging the economy already are reflected in share prices, Trennert says.

That’s something to keep in mind when the inevitable winter or spring pullback in stocks arrives.

Lately, Trennert says, he’s been thinking about the possibility of the one market scenario that would shock nearly everyone: a “melt-up” in share prices this year, as money pours in, rather than the meltdown that so many investors still fear could happen any day.

tom.petruno@latimes.com